Fiduciary move for the long haul
The Dutch pension industry has seen two ground breaking initiatives in the past 12 months, both involving US based asset managers. The first was the decision by the electronics firm Philips to hand the management of its pension fund to Merrill Lynch Investment Managers
The second was the decision of the private transport industry-wide pension scheme Stichting Bedrijfstakpensioenfonds voor het Beroepsvervoer over de weg, or Pensioenfonds Vervoer, to appoint Goldman Sachs Asset Management (GSAM) to act as a fiduciary manager for its €5.4bn pension fund assets.
The second deal is the largest of its kind so far among Dutch funds, and means that more than a quarter of the €40bn of assets that GSAM manages as a fiduciary manager worldwide are now in the Netherlands.
Pensioenfonds Vervoer’s chief investment officer, Patrick Groenendijk, says the decision to appoint a fiduciary manager was based on the conclusion, backed by academic research, that 90% of the return on assets derives chiefly from smart asset allocation rather than the choice of smart managers.
“This means that a pension fund really needs to focus on strategy and not spend an large amount of time on manager selection,” he says.
Groenendijk was recruited by Pensioenfonds Vervoer in November last year from Barclays Global Investors where he was a principal, responsible for strategic client relationships in the Benelux. Before this, he was at Dutch metal industry pension fund PME, the fifth biggest pension fund in the Netherlands, where he was head of investment strategy. At PME he was part of a team that produced an investment return of 6.5% per annum over the last three years, one of the highest returns in the Dutch pension industry.
His recruitment was part of a large-scale reorientation of the way Pensioenfonds Vervoer manages its assets and liabilities.
As a first step in this re-orientation process, the management board set up an executive office or ‘bestuursbureau’ based at Schiphol airport, near Amsterdam. The office was designed to be a command and control centre for a new asset management model, whereby the choice of asset managers was to be outsourced to a fiduciary manager. To keep costs down, the office was kept small, comprising only four people, including the chief executive officer and the chief investment officer.
The aim was to introduce an additional layer of management between the board of the pension fund, which is manned largely by non-investment professionals, and the fiduciary manager and the asset managers they selected, says Groenendijk. “The purpose of having the new structure is firstly to have somebody looking after the investments full time, whereas previously there were no professionals looking after the investments,” he says.
Although a full-time professional, Groenendijk also acts as the board’s eyes and ears. “They view me as a board member at arm’s length, somebody who is overseeing the asset managers on their behalf.
“Secondly, the purpose is to get independent advice on strategy, independently from the asset managers that work for us. So I will get advice from the new fiduciary manager, of course, but I can also go into the market for independent advice, have ALM consultants do studies, whatever I think is necessary to come up with a good investment plan that I need to propose to the board. So it’s also about improving the quality of strategy.
“And then thirdly the purpose is to not only to think about strategy but also to look and judge whether the fiduciary manager is doing a good job or not.”
The next step in the re-orientation of the management of Pensionfonds Vervoer’s assets was to appoint Northern Trust as master custodians of both its pension and pre-pension assets, with an asset servicing mandate for global custody, compliance monitoring, performance measurement, commission recapture and securities lending.
The final step was to appoint a fiduciary manager to take over the investment management of the assets from the current incumbent. The assets of Vervoer’s pension and latterly pre-pension fund have until now been managed by a single manager, F&C, part of the Eureko group. Groenendijk says that this was too much for one asset manager to handle. “One manager cannot be good at everything, so some of their mandates were doing quite well but some of the others are doing not so well. In particular, F&C was not delivering outperformance in US equities and emerging market equities.
“It is also very hard to fire yourself, so to speak, whereas a fiduciary manager can easily change a manager if someone disappoints in a certain asset class.”
Earlier this year, Pensioenfond Vervoer appointed GSAM to manage the fiduciary management mandate across all of the pension fund’s assets – including equities, fixed-income and hedge funds.
The fiduciary management mandate will also extend to Stichting Prepensioenfonds voor het Beroepsgoederenvervoer, Vervoer’s pre-pension fund which has €2.1bn in assets.
GSAM was selected from a ‘long list’ of almost 20 firms drawn up by Groenendijk and the consulting firm Goris & Partners. “Some of them were really not fiduciary managers but just old style asset managers. Because they were able maybe to select some outside hedge funds they could then call themselves fiduciary managers.
“That was not what we were looking for. We were looking for a company that would really go out in the market and select for us the right managers for each and every mandate.
“We ended up with a fairly small number of companies that could really fulfil this role, and in the end they were selected because they presented themselves as the most bespoke, the most willing to really tailor their offering towards our needs.”
One of the criteria for selection was complete objectivity, says Groenendijk. Any conflicts of interest would be avoided, he believes, if the fiduciary manager did not include their own funds in the multi-manager selection process.
This was a deciding factor in the choice of GSAM, says Groenendijk: “Goldman is not going to manage one euro themselves. They will go into the market themselves and look for managers for all the asset classes that we invest in.
“The way we’ve structured it now is, in our opinion, the cleanest way to set it up and cleanest in terms of the least potential for conflicts of interest. So that was definitely a factor that we took heavily into account.”
F&C currently still manages the entire Vervoer portfolio, with the exception of a Dutch direct real estate portfolio which is managed domestically. Whether F&C will continue to manage any of the portfolio is an open question, says Groenendijk. “We’re still studying the path on how to transition certain parts of the portfolio. If Goldman thinks that they (ie, F&C) are very good in a certain asset class and they were hired as the best manager then we would have no objection whatsoever. Goldman is free to hire anybody that they feel comfortable with.”
As fiduciary manager, GSAM’s global manager strategies team will be responsible for overseeing the overall portfolio and realising a better risk-return profile. The areas of responsibility of this team and of Pensioenfonds Vervoer’s executive office are clearly delineated, says Groenendijk: “They will make the manager decisions and we will make the strategic decisions in terms of which asset classes to invest in, how much to invest in each asset class, and how much risk to take.”
GSAM will also be providing general advice to Pensioenfonds Vervoer on risk budgeting, benchmarking and managing active risk. “Risk budgeting advice is important, and will become more important as they get to handle larger chunks of the portfolio,” says Groenendijk.
“Risk budgeting cannot be separated from the mandates that the fiduciary manager awards to the asset managers,” he says. “I may tell them, for example, that we have an overall tracking error budget of 200 basis points, and they will then come up with a proposed structure in which they might give the Japanese equities manager 4% tracking error while proposing more of an indexed structure for US securities.”
Yet any changes to the strategic asset allocation will have to wait until the end of the year. This is because industry-wide pension schemes are not allowed to change their strategic benchmark during the year. The regulation was introduced to ensure that the performance of industry-wide schemes could be compared.
“We are allowed to deviate somewhat but that would be a tactical deviation which is limited of course in the amount of risk that we can take,” says Groenendijk. “For strategy changes we will have to prepare them in the second half of this year and propose them to the board in order for them to come into effect next year.”
The switch from a single asset manager to a fiduciary manager presiding over a multi-manager structure will not necessarily lead to changes in the strategic asset allocation. Groenendijk says. “We will make changes not so much because there’s a change in management but because there might be changes in strategy that are sensible in themselves, without taking into account who is actually going to manage the money.”
Other, external factors are likely to lead to changes, says Groenendijk. “We’ll have new pensions regulation in the Netherlands next year so that will have an effect on the portfolio. We also still have a sizeable Dutch equity portfolio which looks somewhat old-fashioned in an integrated EU. These could be changes that will be pretty easy to incorporate.
“And like every pension fund, we are constantly looking at new asset classes and I’m going to have to judge whether it is worthwhile to invest in assets like infrastructure, private equity and commodities.” Vervoer has structured the way it rewards its fiduciary manager to encourage outperformance, he says. “The fiduciary manager will receive a fiduciary base fee, or management fee, and they will also be rewarded on the basis of their outperformance. So, for example, if the whole fund was under their responsibility, their benchmark would be the policy portfolio, the passively managed, benchmark portfolio. They would then be rewarded on the basis of how much they outperformed that portfolio.”
In turn, the fiduciary manager will be encouraged to negotiate competitive fees with the asset managers that they select.
“One of the reasons why we based our measure of outperformance on performance after the costs of the underlying manager fees was to incentivise the fiduciary manager to negotiate tough fees with the underlying managers,” says Groenendijk.
Fiduciary managers, like asset managers, are only as good as their last investment decision, and GSAM, like the asset managers they hire, are technically on a day’s notice of dismissal, says Groenendijk. “We always work with contracts that can be terminated on a 24 hour notice, although there might be certain asset classes at some point in time, like hedge funds or private equity, which you can’t get rid of in 24 hours because of lock-up periods. But as a general principle it’s all on a 24 hours notice basis.”
Yet the arrangement with GSAM is likely to remain in place for the foreseeable future, he says. “I don’t expect us to revisit our decision every two weeks, but it is always good to keep people on their toes and to once in a while look at how things are. And they’ll definitely have to come up with a good performance in order to keep the mandate for a long time.”
And he is confident they will deliver: “We believe we have found a fiduciary management partner who has the skill set to manage and oversee our pension fund for many years. Trust, continuity and deep expertise are the keys to any fiduciary management partnership and we believe that together Vervoer and GSAM will be able to deliver the returns within the risk framework our pension fund requires.”
Groenendijk suggests that Pensioenfond Vervoer’s business model could provide a model for medium and small pension schemes in the Netherlands, currently languishing under the weight of new impending regulations.
“I strongly believe that this is a good model, and we are presenting this as a way to go forward. It’s very hard to get good, talented people in Holland for in-house management of portfolios. If you want to do good manager selection you need a number of people to do that on a professional basis. This seems to me a pretty efficient way of managing money.”